Residential Property – Capital Gains

The so-called bright-line test to be applied to gains from the sale of residential property bought and sold within 2 years was announced in the budget in 2015.

Submissions on the proposal closed on the 24th of July, and once enacted, the bright-line test will apply to residential properties for which an agreement to purchase was entered into on or after the 1st of October 2015.

The only exemptions are a person’s main home (including a main home held in trust), property that is transferred under a relationship property settlement and inherited property.

It will be important for purchasers and sellers of property to be careful with the definitions of the date of acquisition and disposal.

The purpose of the changes is to strengthen the existing taxes on capital gains on property which has been acquired for the purpose of resale.

At the present time, buying a property with the intention of on-selling creates a liability for capital gains tax. This has been difficult to police, and the subjectivity of the test has made it a less effective way of taxing capital gains made by property speculators.

The new test is expected to tighten these rules and in particular is prompted by the property speculation evident in the Auckland property market. The legislation will be part of a number of regulatory measures increasing the information sharing between departments and information which must be supplied by any purchaser of residential property before ownership of the property can be transferred.

It can be seen that in the relatively sedate residential property markets prevailing in the provinces, the legislation will have little impact where capital gains in recent times have been as low as 1-3%.

Of more immediate impact will be the new information gathering requirements for purchasers of property, which their solicitors will need to provide prior to being able to register transfers at the Land Transfer office.

For further information contact one of our team of property lawyers, based in Hawke’s Bay team.